The Long View on the Euro Zone

Looking past the immediate implications of the Greek election, this strategist still sees plenty of reasons for concern for the euro.

Phew. The pro-bailout forces prevailed in Greece, and the euro got a temporary lift. But as rising Spanish bond yields suggest, there are still plenty of headwinds for the euro zone.

"The euro zone crisis is clearly escalating, and it would be wrong to focus too much on Greece," says Jens Nordvig, chief G10 FX strategist for Nomura Securities. "The underlying cause is the unstable configuration of the euro zone: the incompleteness of the monetary union has started to cause destabilizing capital flight, and only fundamental reform is likely to stop it."

Unfortunately, Nordvig wrote in a note to clients, fundamental reform is not so simple. "First, the ECB remains unwilling to step in, leaving markets in a near-term vacuum," he says. Policymakers are working with new seriousness on a plan to save the euro, he notes, but "public support for the euro project is waning according to most opinion polls, making it difficult for policymakers to take the needed big leap towards fiscal integration."

On top of all that, Nordvig says, the issue of capital flight is becoming more pressing. He predicts that "the recent volatility in Spanish markets means that this market will probably now be a no-go zone for most investors, except those with experience in distressed situations." And he says real-time indicators "continue to point to unusual buying" of foreign assets by euro zone investors.

So Nordvig remains bearish on the euro, and bearish on risk assets generally, and he has taken positions using options to express that. To play his outlook more directly, he says, "Look to sell EURUSD in cash on bounces linked to what we consider false hope that a real solution is forthcoming."